2022 (6) TMI 1497 - AT - Income Tax

AO cannot reopen assessment under section 147 when incriminating documents found during search operations require section 153C assessment instead

Sh. Janak Raj S/o Sh. Murari Lal, Sh. Kanwarjit Singh S/o S. Tara Singh Versus Income Tax Officer, Ward- II (2), Muktsar.

ITAT Amritsar quashed reassessment proceedings under section 147 where incriminating documents were found at third party premises during search ... Validity of reassessment proceedings - documents found at a third party premises - as argued AO was required to frame assessment u/s 153C as he has himself stated in the assessment order that during the course of search at the premises of Sh. Rajan Setia, certain incriminating documents related to sale transaction was gathered - HELD THAT:- As the assessment framed u/s 143(3) after reopening u/s 147 of the Act is ex-facie contrary to the ratio laid down in the case of Sanjay Singhal (HUF) v [2020 (9) TMI 338 - ITAT CHANDIGARH] wherein held in the light of the provisions of section 158BH of the Act, once there is a conflict between the two streams of procedure the provisions of Chapter XIV-B of the Act shall prevail and have primacy. Once assessment has been framed under section 158BA of the Act in relation to undisclosed income for the block period as a result of search there is no question of the AO issuing notice u/s 148 for reopening such assessment as the said concept is repugnant to the special scheme of assessment of undisclosed income for the block period. The first proviso u/s 158BC(a) of the Act specifically provides that no notice u/s 148 of the Act is required to be issued for the purpose of proceedings under Chapter XIV-B. - Therefore, the assessment order is hereby quashed. Issues Involved:1. Validity of issuance of notice under Section 148 of the Income Tax Act, 1961.2. Addition of Rs. 535697/- on account of purchase of land.3. Violation of principles of natural justice during assessment.4. Opportunity to cross-examine witnesses.5. Legality of proceedings initiated under Section 148 instead of Section 153C.Detailed Analysis:1. Validity of Issuance of Notice under Section 148:The assessee contended that the notice issued under Section 148 was invalid as it was based on documents found at a third party's premises. The Tribunal noted that the case involved reopening under Section 147 and subsequent issuance of notice under Section 148. The Tribunal referred to precedents, including decisions in the cases of Sh. Sanjay Singhal (HUF) v. The DCIT and Income Tax Officer v. Arun Kumar Kapoor, which held that if documents related to the assessee were found during a search on a third party, the correct procedure would be to proceed under Section 153C, not Section 147/148. Consequently, the Tribunal quashed the assessment order framed under Section 143(3) after reopening under Section 147, deeming it illegal and unjustified.2. Addition of Rs. 535697/- on Account of Purchase of Land:The assessee challenged the addition of Rs. 535697/- made by the Assessing Officer on account of the purchase of land. The Tribunal did not specifically address the merits of this addition in detail, as it quashed the entire assessment order on the grounds of procedural invalidity. Therefore, the issue became academic and was not adjudicated further.3. Violation of Principles of Natural Justice:The assessee argued that the assessment deserved to be quashed due to gross violations of the principles of natural justice. The Tribunal acknowledged this contention but did not delve into it deeply, as the primary ground for quashing the assessment was the procedural invalidity of the notice under Section 148.4. Opportunity to Cross-Examine Witnesses:The assessee claimed that the CIT(A) passed the order without allowing an opportunity to cross-examine key witnesses whose statements were relied upon in the assessment. This issue was also rendered academic due to the quashing of the assessment order on procedural grounds.5. Legality of Proceedings Initiated under Section 148 Instead of Section 153C:The Tribunal extensively discussed the legality of initiating proceedings under Section 148 based on documents found at a third party's premises. Citing multiple precedents, including decisions by the Hon'ble Gujarat High Court and ITAT Benches, the Tribunal emphasized that the correct course of action in such cases would be to proceed under Section 153C. The Tribunal concluded that the initiation of reassessment proceedings under Section 147/148 was wholly invalid, void, and bad in law. Consequently, the assessment order was quashed.Conclusion:The Tribunal quashed the assessment orders in both appeals, primarily on the grounds that the proceedings should have been initiated under Section 153C instead of Section 147/148. As a result, other grounds raised by the assessee, including the addition of Rs. 535697/- and alleged violations of natural justice, were rendered academic and were not adjudicated. The appeals were partly allowed.